Analysis & Opinion

BERLIN (Reuters) - Greece faces severe restrictions on its sovereignty and must privatize state assets on a scale similar to the sell off of East German firms in the 1990s after communism fell, Eurogroup chairman Jean-Claude Juncker said.

In an interview published after euro zone finance ministers in the Eurogroup approved a further 12 billion euro ($17.43 billion) installment of Greece's bailout, Juncker said he was optimistic that measures agreed with Athens would help to resolve the country's problems.

"The sovereignty of Greece will be massively limited," he told Germany's Focus magazine in the interview released on Sunday, adding that teams of experts from around the euro zone would heading to Greece.

"For the forthcoming wave of privatizations they will need, for example, a solution based on a model of Germany's 'Treuhand agency'," Juncker added, referring to the privatization agency that sold off 14,000 East German firms between 1990 and 1994.

The Greek parliament voted on Thursday to set up a privatization agency under austerity plans agreed with the European Union and IMF which have provoked violent protests on the streets of Athens.

Greeks are acutely sensitive to any infringement of their sovereignty or suggestions of foreign "commissars" getting involved in running the country.

"One cannot be allowed to insult the Greeks. But one has to help them. They have said they are ready to accept expertise from the euro zone," Juncker said.

Athens must sell off five billion euros in state assets this year alone or risk missing targets set under its EU/IMF program, which could cut off its funding needed to keep the government running and avoid a debt default.

A repeat of Germany's Treuhand experience may prove bitter for Greeks, who are already suffering soaring unemployment as a recession drags into its third year.

Once the world's biggest holding company, Treuhand was supposed to sell off state property at a profit but closed its books with a huge deficit and a legacy of bitterness among the legions of workers whose jobs it destroyed.

Four million Germans were employed by Treuhand-owned companies in 1990 but only about 1.5 million jobs were left in 1994 when the agency closed.

Instead of reaping profits to be distributed to all east Germans, as it was designed to do, it ran up debts of 270 billion marks ($172 billion) in the fire sale of assets.

"NOT FULLY FUNCTIONAL"

Juncker, also Luxembourg's Prime Minister, first floated the idea of a Treuhand-style agency for Greece in May. He said then he believed Greece could raise considerably more than the 50 billion euros in asset sales.

"The current package of measures, which Athens has agreed to, will bring a solution to the Greek question," he said in the

Focus interview. However, he added that the Greek tax collection system was "not fully functional."

On Saturday, euro zone finance ministers agreed that the fifth tranche of the 110-billion-euro bailout agreed with Greece in May 2010 would be paid by July 15, as long as the IMF's board signs off on the disbursement. The IMF is expected to meet on July 8 to approve it.

The payment will allow Greece to avoid the immediate threat of default, but the country still needs a second rescue package, which is also expected also to total around 110 billion euros and which will now probably be finalized only in September.

Juncker said the Greek crisis had been largely caused by itself. "Between 1999 and 2010 wages rose 106.6 percent even though the economy did not grow at the same pace. The wage policies were completely out of control and not based on (gains in) productivity," he said.